Bangladesh will need higher growth to move forward and escape the ‘middle income trap’. This will depend on how reforms and institutional strengthening take place in the country, said Fahmida Khatun.

Published in New Nation on Thursday, 5 November 2015.

Financial transparency needed to attain middle-income country

Economic Reporter

Bangladesh needs to reform its public administration and strengthen the Anti-Corruption Commission to improve financial transparency and economic governance. The financial transparency and economic governance would help Bangladesh become a middle-income country, said Dr. Fahmida Khatun, Research Director of Centre for Policy Dialogue (CPD) recently.

“Unfortunately, neither of these institutions is capable of discharging its responsibility without political influence”, she claimed.

Bangladesh’s recent graduation to the World Bank’s lower-middle income category from a low-income category was only a matter of time. Bangladesh has manifested the features of a modern economy. It has changed structurally from traditional agricultural dependency to industry and services sectors. The strength of the economy is also reflected through its integration into the global economy, through higher exports, imports, remittances and foreign direct investment. More than 60 per cent of the economy is globally integrated, said the research director.

Despite several problems, such as lack of power and energy, technological bottlenecks and political instability, Bangladesh’s favourable policy environment and continuity of policies contributed to the growth of the country, she observed.

After adopting a market-oriented economy in the 1980s under the Structural Adjustment Programmes of the World Bank and the International Monetary Fund, Bangladesh undertook various reforms. These included withdrawing agricultural subsidies, privatising state-owned enterprises, liberalising the financial sector and withdrawing import quotas.

The liberalisation process was consolidated in the 1990s and built further momentum in the 2000s. Bangladesh’s currency, the taka, was made convertible in the current account. The country adopted a floating exchange rate, significantly reduced import duties, removed controls on the movement of foreign capital and deregulated interest rates to allow competition among banks.

Global policies and institutions also contributed to higher growth in Bangladesh. For example, income from ready-made-garments (RMG) – the major export item – and remittances from migrant workers have helped sustain high growth. This provided a major boost to RMG exports from Bangladesh’s textile industry.

As RMG is a major source of income and employment – particularly for women – the sector also contributes towards poverty reduction. Bangladeshi workers participating in global labour markets have earned a significant amount of remittances, which have also contributed to higher national savings, said Fahmida Khatun.

“Yet the country’s higher income status also implies that it will have more opportunities, including easier access to commercial loans from global credit markets and foreign direct investment”, she said.

Going forward, Bangladesh has to strive for further growth and higher income so that it can generate enough resources to continue its development. In particular, it must achieve the capacity to repay foreign loans and fund development with domestic resources.

Bangladesh will need higher growth to move forward and escape the ‘middle income trap’. This will depend on how reforms and institutional strengthening take place in the country, said Fahmida Khatun.

Future growth potential will also depend on the capacity of the country to attract more investment, which was modest in the 2000s. Moreover, this investment comprised mainly public sector investment, through upscaling annual development programs. Investment in infrastructure such as the transport and energy sectors is needed to attract investment in other sectors, she said. Investment is also needed for developing human resources, upgrading technology, innovation and research and development. Despite Bangladesh’s growth, productivity has not improved due to lack of adequate investment in these areas. For example, productivity in the RMG sector is the lowest among its competing countries such as China and Vietnam, she also pointed.

Bangladesh is poised to move forward. It will have to focus not only on growth, but also on the quality of growth so that sustainability is ensured. This will hinge on whether Bangladesh can energise its investment regime through regulatory and institutional reforms, diversify its exports and reduce inequality through creating decent jobs for all, said Fahmida Khatun.




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